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Chapter 3,4, & 5
Chapter 3,4, & 5
16
Economics
Graduate
01/10/2009

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Term
Utility
Definition
numerical score representing the satisfaction that a consumer gets from a given basket
Term
Indifference Curve
Definition
represents all combinations of market baskets that provide a consumer with the same level of satisfaction
Term
Marginal Utility
Definition
Additional satisfaction obtained from consuming one additional unit of a good
Term
Substitution and Marginal Utility
Definition
marginal utility is the additional satisfaction obtained from consuming one additional unit of a good; MU decreases as more of a good is consumed.

Substitution - increase in price of good A will result in increased consumption of good B.
Term
Budget Constraints
Definition
constraints that consumers face as a result of limited incomes
Term
Cost of living index
Definition
ratio of the typical bundle of consumer goods and services compared with the cost during a base period
Term
BLS (chain weighted index
Definition
Bureau of Labor Statistics cost-of-living index that accounts for changes in quantities of good and services
Term
total utility
Definition
aggregate sum of satisfaction or benefit gained from consuming a given amount of goods or services. The more consumed the greater the total utility.
Term
normal and inferior goods (4)
Definition
inferior good - the quantity demanded falls as income increases. Causes income elacity is negative.
normal good - the income consumption curve is positive. the quantity demanded increase with income
Term
demand curve
Definition
individual demand is curve relating the quantity of a good that a single consumer will buy to its price
Term
income elasticity
Definition
positive with normal goods (demand increases when income increases); negative with inferior goods (demand decreases when income increases).
Term
cross elasticity outcomes
Definition
with substitutes price increase in good A will increase consumption of good B. When complements, price increase in good A decreases consumption of good B.
Term
For every price change there are income and substitution affects
Definition
Substituion Effect - always the same effect; decline in price results in increase in consumption of the good.

Income effect - can move demand in either direction depending on whether good is normal (income increases, consumption increases) or inferior (income increases, consumption decreases)
Term
(5) diversification to minimum risk
Definition
reducing risk by allocating resources to a variety of activities whose outcomes are not closely related
Term
CAPM (Capital Asset Pricing Model)
Definition
model in which the risk premium for a capital investment dependso n the correlation of the investment's return with the return on the entire stock market.
Term
Equation for CAPM
Definition
Rp=Rf+b
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